Housing finance reform is a nut that still can’t be cracked because of a lack of consensus among those involved, but most agree the status quo can’t continue.
“When we put them in conservatorship, we never expected to have a third anniversary without an idea of where we were going,” said former Federal Housing Finance Agency Acting Director Ed DeMarco, speaking of a strategic plan he and his team were working on back in the fall of 2011.
That was one of the few points of consensus among key panelists at the Bipartisan Policy Center’s Housing Summit in Washington, D.C. on Monday afternoon.
Currently, the four primary legislative plans for GSE reform are all stalled. The brief summary on the various GSE reform measures in Congress, provided by the Structured Finance Industry Group, can be read or downloaded here. The full reports from SFIG can be read here.
DeMarco discussed the four biggest problems with the ongoing conservatorship under which Fannie Mae and Freddie Mac have operated since 2008.
“Everyday they are operating with uncertainty – doing $100 billion dollars worth of new business every month with a 30 year tail,” he said. “Every day they make new financial guarantees. And someone has to be manage that tail. The conservatorship cannot simply stand still – eventually you will have staff and management will drift away. Doing nothing including trying to stand still exacerbates the risk.”
Further, DeMarco said, the GSEs are operating with a small amount of capital for what they are doing, and that the more the powers that be wait, the more private capital is going to drift into other areas.
“The conservatorships are a huge barrier to private capital,” he said.
The fourth risk, DeMarco said, is that government continues to make decisions and make policy decisions on the mortgage market, and that capital allocation and pricing decisions are being made based on political considerations and biases rather than sound, market-driven direction.
“We just watched that movie — I don’t think we want to watch it again,” he said.
Bruce Morrison of Morrison Public Affairs Group said it is imperative to bring in private capital to narrow the scope of taxpayer risk and broaden the scope of private risk.
But, he said, reform based on the four aforementioned legislative packages is just not possible right now.
“The (Obama) administration is going to act by affirmatively moving ahead of opposing change,” Morrison said. “There is no support for a big-bang comprehensive solution that can get through Congress at this time.”
Adolfo Marzol with Essent US Holdings said that simply raising g-fees or other efforts to “crowd in” private label capital are not enough, and that a structural change is necessary.
“There are a lot of structural impediments to bringing back PLS and how high fees must be,” Marzol said. “We have to replace ‘crowd in’ with ‘build in.’ If you’re going to do an administrative build in, you have to do it with existing credit enhancement in place.”
He added that the housing finance system is too big to turn the lights out on one way of doing business and turn the light on.
“We need time to have transition,” Marzol said.
Nagendra Jayanty of Claren Road/Carlyle said the transition needs to be funded, and that profits from the GSEs should be used to create a fund for just that.
“How do we fund that transition? We talk about the lack of capital and we think that entrenches the system longer,” Jayanty said. “Your biggest fear is that the new system doesn’t work, you’re not going to invest another dollar if you think won’t work.
“(So we) need a source of capital there to fund the transition. Use GSE profits to help capitalize the system, fund the (proposed Federal Mortgage Insurance Corporation) today – it makes it much easier down the road,” he said. “We should be using the funds to capitalize the new system.”
Morrison said that wasn’t a good idea.
“(Having) a political food fight over how to use these funds (isn't going to help),” Morrison said.